Draghi, a Rabbit, the Euro and the Magic Trick Traders Envision
ECB Readies For (FX Weakening) Action; Stay Short EUR/USD - RBS For the December’s ECB meeting, RBS Economists expect a 20bps cut in the deposit rate to -0.40%, an acceleration of QE purchases to EUR85bln/month and an extension of the QE programme to March 2017.
"If delivered, this would be more aggressive than the (Bloomberg) consensus expects. The market reaction to the BoJ and Riksbank policy statements show that rate cuts rather than QE extensions are the more powerful driver of currencies on the announcement of easier policy.
Positioning looks relatively light compared to earlier ECB policy easing moves; latest IMM data indicate modest speculative EUR/USD shorts and the one week riskreversal is bid for EUR calls. The ECB probably has (more) currency weakness very high on its list of priorities. In pursuit of that, the ECB may well cut and stress that rates are not yet at the lower bound," RBS argues.
"We like short EUR/USD exposure into the meeting and beyond," RBS advises.
ECB Preview: Gladiator Draghi on War Path in Fight Against Deflation The current asset purchasing program of the European Central Bank (ECB) is likely to be extended to March 2017 and the deposit rate cut further into negative this Thursday, as the bank is on the war path against a deflation threat that could have a detrimental effect on highly indebted countries and in the case of it lasting for a longer period of time also negatively affect investment and growth.
"We expect the ECB to cut the deposit rate by 20bp to -0.40% accompanied by a two-tier deposit rate system," said Christophe Barraud, chief economic strategist at Market Securities, predicting an expansion of the asset purchasing until March 2017 with an additional €15 billion to the current monthly purchases.
The monetary policy cycles of the ECB and Federal Reserve (Fed) are therefore set to diverge in December, with the ECB easing monetary policy further while the Fed is increasingly likely to deliver a first interest rate hike in a decade.
However, the recent manufacturing data delivered by private researchers brings into question the thought processes of the two central banks. While PMIs across the euro zone came in better than expected, manufacturing activity in the US fell into recession territory in November.
How Draghi could rescue euro shorts 10 minutes until the press conference Draghi needs to promise at least 15 billion more euros of QE for at least another six months. That would meet the bare minimum of expectations.
In concrete terms, I can't see him exceeding that but he can jawbone.
The strongest move might be to make bond purchases open ended. Right now there is a Sept 2016 end-date for the QE program. He could simply switch that to open ended. That will create a mess down the road but it would be powerful now without necessarily committing to anything.
The other thing the ECB could do is hint at other measures.
If the will is weak but the jaw is strong, it could salvage the day for euro bears.
Draghi: ECB will extend QE until March 2017 ECB press conference Dec 3, 2015:
- We conducted a thorough assessment of inflation and monetary policy
- Seven month extension in QE
- No increase in QE value per month
- Will reinvest QE proceeds
No additional QE = get out of euro shorts.
ECB governors criticised Draghi for trying to paint them into a corner - sources Reuters quote unnamed sources on the plays within the European Central Bank Council meeting on Thursday:
- ECB's Governing Council viewed the economic outlook as improved, updated inflation forecasts were not as bad as feared
- Pending Federal Reserve rate hike also factored into the decision, though to a lesser extent
- Concerned that a big ECB move would weaken the euro further
- One source with direct knowledge of the situation interpreted Draghi's public stance ahead of the meeting as trying to pressure the Governing Council to take bigger action.
"Draghi raised expectations too high, on purpose, and attempted to paint the Governing Council into a corner," the source said. "This was problematic and he was criticized for this by several governors in private."source
Have the ECB done enough to raise inflation expectations? Economic sentiment data at 10am GMT also gives us the latest inflation expectations
Economic sentiment in the Eurozone is at the highest for some years and that sentiment is partly behind the improvement that the ECB have mentioned recently
It's expected to come in unchanged at 106.1 with some minor improvements in some of the sub indexes
At the same time we also get the final consumer confidence numbers. The important part of this is the inflation expectation numbers. Last month inflation expectations rose to 3.7 while selling prices were -0.7. If the ECB has left its mark via their last meeting then we could see those expectations rising. If they fall then that's going to raise the dovish chatter
At the moment, money markets are pricing in a 50% chance of the ECB cutting the deposit rate by 10bp at it's March meeting, report Reuters
Like most currencies at the moment, the euro doesn't seem to be trading anything other than problems elsewhere so there's a chance it ignores the data, unless there's a big variation. Still, it's worth noting the numbers to get an idea of which way the ECB might sway going forward
Reuters poll shows 59 of 68 economists looking for a deposit rate cut in March Latest poll conducted by Reuters
- median 80% probability that ECB will ease policy in next 6 months
- 50 % probability ECB will increase its monthly asset purchases
- 31 of 59 economists agree with Draghi that the ECB has plenty of instruments at its disposal
- Free trading apps
- Over 8,000 signals for copying
- Economic news for exploring financial markets
You agree to website policy and terms of use
Mario Draghi needs to come up with something to surprise currency traders next week or risk a euro rebound that would threaten his efforts to boost inflation.
The good news for him is that strategists are gaining confidence the European Central Bank president will pull it off and exceed the market’s expectations for monetary easing at the Dec. 3 policy meeting.
Forecasters are cutting their year-end and first-quarter euro estimates at the fastest pace since March, when the start of the central bank’s bond-buying program sent the currency tumbling to a 12-year low. Options signal there’s a 70 percent chance the euro will match that low this year, up from 18 percent when the ECB last met in October.
“He’s going to pull a rabbit out of the hat -- we’re just not sure what that rabbit will be,” said Steven Bell, London-based chief economist and director of macro strategies at BMO Global Asset Management, which oversees about $244 billion. “The euro is going down heavily.”
Bell predicts the shared currency will drop below parity with the dollar next year, after it sank to $1.0566 on Wednesday, its weakest level since April and approaching this year’s low of $1.0458 reached on March 16. It was little changed on Thursday at $1.0619 as of 10:05 a.m. New York time.
Ways that Draghi might exceed investors’ expectations include lowering the ECB’s minus 0.2 percent deposit rate by 0.2 percentage point, Bell said. Futures prices compiled by Bloomberg suggest that only a 0.1 percentage-point cut is fully priced in.
The ECB chief may also expand the bank’s quantitative-easing plan to include assets such as corporate and local-government bonds or remove the rule preventing it from buying securities that yield less than the deposit rate, according to Bell.
Turbulent Year
A weaker euro is key to the ECB’s ambition to boost inflation to 2 percent. Yet even after a 12 percent slide this year as policy makers increased the money supply, prices are barely rising across the 19-nation economy. Part of the reason is the euro’s mid-year rally as a meltdown in emerging markets prompted investors to unwind riskier trades funded in the currency.
The risk for Draghi -- and the euro -- is that he fails to live up to the growing speculation that he has a surprise in store.
While the ECB chief has been dropping hints about extending stimulus since the central bank’s Oct. 22 meeting, he’s been vague about the details. Further euro losses are by no means assured.
Since the October gathering, strategists surveyed by Bloomberg have cut their median year-end euro forecast by 3 U.S. cents to $1.07, and their first-quarter outlook by 2 cents to $1.06. Those predictions still put the shared currency slightly stronger by Dec. 31.
read more